Fact And Comment

The financial crisis is reaching a climax. Either Washington will let the banking system go into cardiac arrest, or it will take measures to bring it back to life so it can vigorously function again. The frightening severity of the crisis and the political imperative not to let banks collapse the way they almost did in 1933 will force the Obama Administration to take the necessary actions.

--Get rid of mark-to-market accounting rules, which are unnecessarily destroying the balance sheets of banks and other financial institutions. For regulators and auditors to force banks to repeatedly write down the value of their regulatory capital based on an impaired market is an astonishing absurdity. Selling anything in a distressed market always leads to artificially low prices. If mark-to-market accounting had been in effect in the early 1990s, when we last had a financial crisis, most of the major commercial banks would have gone under. We'd have had another Great Depression. To appease those who think there is use in this kind of pricing of assets, include it in a footnote.

--Bring back the uptick rule for short sales, and demand that the SEC enforce regulations against naked short-selling.

FDR in 1933, signing the Emergency Banking Act to deal with the impending collapse of U.S. banks.

--Have the Federal Reserve aggressively buy mortgage-backed securities from banks. This would trigger a mass of refinancing at low, fixed rates of 4.5% to 5%. Housing prices would move up, and housing sales would revive.

Nationalize banks? A horror. You can bet that would truly paralyze the flow of credit: Does anyone believe Washington can manage banks?

Sadly, in human affairs it is sometimes necessary for a crisis to reach an acute, mortal stage before effective action is taken. The inflationary virus of the 1970s had been felled by the Fed by the spring of 1982. But the central bank kept squeezing hard, plunging the economy ever deeper into recession, with unemployment peaking at nearly 11%. In August of that year the Fed suddenly and dramatically eased up. The reason: Mexico was going to default on its debts, which would have smashed an already fragile banking system.

With the Fed's dramatic reversal, stocks soared and interest rates plummeted. In early 1983 the economy sharply turned upward, and America entered into what was, up to that time, its greatest peacetime boom.

Nina Olson heads the Taxpayer Advocate Service, an independent division within the IRS that is supposed to help taxpayers resolve complaints with the agency when those problems can't be dealt with satisfactorily through normal channels. Each year the Advocate must report on problem areas within the IRS that are in need of improvement. This year's submission--unusually blunt for a government agency--is a taxpayer's delight: "The most serious problem facing taxpayers is the complexity of the Internal Revenue Code. The only meaningful way to reduce these burdens [of compliance] is to simplify the tax code enormously."

Olson didn't go so far as to advocate a flat tax, but anyone who looks at the report can only conclude that we must start over again. As the report states: "Taxpayers who honestly seek to comply with the law often make inadvertent errors, causing them either to overpay their tax or to become subject to IRS enforcement action for mistaken underpayment of tax. [However,] sophisticated taxpayers often find loopholes that enable them to reduce or eliminate their tax liabilities." The Advocate goes on, chronicling the grim realities:

--Individuals and businesses spend 7.6 billion hours a year filling out tax forms for the IRS. "And that figure does not even include the millions of additional hours that taxpayers must spend when they are required to respond to an IRS notice or an audit." Those 7.6 billion hours consume the equivalent of 3.8 million full-time workers.

--The cost of complying with the code comes to $193 billion. Other experts think that assessment is too low and have come up with estimates approaching $300 billion.

--The number of words in the code has grown by 2.3 million since 2001. In 2008 there were more than 500 changes to the tax code. Other surveys have found that the code has been amended some 14,000 times since the mid-1980s.

--No one can cope anymore: "Individual taxpayers find the return preparation process so overwhelming that more than 80% pay transaction fees to help them file their returns."

There are countless examples of the code's mind-numbing complexity. For instance, there are at least 11 incentives to encourage taxpayers to save for and spend on education, with each having different particulars on definitions, eligibility requirements, income-level thresholds, phase-out range and inflation adjustments.

There are at least 16 incentives to encourage saving for retirement, again with different parameters.

The alternative minimum tax is an atrocity in a class all its own. It was enacted four decades ago to ensure that everyone pays income taxes, no matter what loopholes or deductions they might employ. In 1970 only 20,000 filers were affected. By 2010 the number will reach 33 million. Congress, knowing the outcry that would ensue if it whacked the middle class that harshly, regularly enacts a so-called patch, which results in the AMT hitting around 4 million filers. The biggest trip wires for AMT are family size and living in a high-tax state. In other words, if you have a lot of kids or you reside in California, New York or a similarly tax-greedy state, you will fall into AMT quicksand. Writes Olson: "Few people think of having children or living in a high-tax state as a tax avoidance maneuver, but under the unique logic of the AMT, that is how those actions are treated." Olson wants Congress to get rid of the AMT once and for all.

And God help us if Congress again tries to help beleaguered taxpayers. A little more than a year ago, for instance, Congress--with considerable fanfare--enacted the Mortgage Forgiveness Debt Relief Act. Previously, a distressed homeowner who renegotiated his mortgage with his bank had to pay income tax on the amount by which the loan was reduced. This new law was supposed to put a stop to that. But, as the Advocate's report notes, "A taxpayer must file Form 982, [which] is extremely complex, and very few taxpayers or preparers are familiar with it and the form is not included in many tax software packages."

One sees a similar abomination with the Earned Income Tax Credit, which is supposed to give low-income taxpayers a rebate. Naturally,

"The eligibility requirements and computations are complex, yet recipients are relatively less able to understand complex rules and less likely to speak English as their primary language, creating a recipe for confusion." The result: a large number of improper claims by taxpayers and improper denials by a confused IRS.

And on it goes.

Our frustrated National Taxpayer Advocate recommends: "The tax laws should be simple enough so that most taxpayers can prepare their own returns without professional help, simple enough so that taxpayers can compute their tax liabilities on a single form, and simple enough so that IRS telephone assistors can fully and accurately answer taxpayers' questions. The tax system should incorporate a periodic review of the tax code--in short, a sanity check."

President Obama could steal the tax issue once and for all from the GOP if he took up the flat tax. Such a radical reform would rocket our economy out of recession and onto an awe-inspiring growth trajectory. But this is one rendezvous with destiny that our new Chief Executive will likely miss. Too bad for him and, more important, for us and for the world.

Major League Baseball should do itself a favor and send Commissioner Bud Selig to the showers--for good. His handling of the scandal of steroids and other banned substances has been a disaster, a classic case of managerial incompetence.

For years baseball averted its collective eyes from what was going on, as did other professional sports. But while football and most other sports were finally facing the problem decisively, Selig dithered. It was not until 2003 that any testing program was instituted, and then the results were not made public. It's therefore hardly a surprise that numerous players were guilty of using the "juice."

Selig behaved as if ignoring the whole issue would make it go away. Instead, he should have been aggressively pushing frequent, unannounced, up-to-date testing, with severe penalties imposed for infractions. His mantra should have been: What's past is past, but God help any players guilty of future wrongdoing. And if the players union had resisted, Selig could easily have rallied public opinion--and Congress--to his side. Baseball survived the Black Sox scandal of 1919 because it acted vigorously when the thing broke.

So having been negligent and then indecisive, how did Selig react when someone leaked supposedly confidential test results that in 2003 Alex Rodriguez used two no-no drugs (about which A-Rod--unlike Barry Bonds or Roger Clemens--immediately came clean)? Selig harrumphed that he might suspend Rodriguez. Then he said he wanted MLB officials to question A-Rod.

What is Selig inhaling? Putting aside all concept of a statute of limitations, picking on Alex Rodriguez is not going to restore baseball's reputation. Nor will it remove the stain the sport will always carry from the "juice era"--the 1990s through the early part of this decade. That entire period will be under a cloud, no matter what Selig does now to make up for his own willful negligence. Fans will forever look at the performances of that time with skepticism, if not disdain. And what about the 103 other players who tested positive in 2003? Are examples going to be made of them? What about the players who were never tested but who used now banned drugs?

There's another reason that Selig's haughty posturing is laughable: This is the commissioner who used the power of his office to move his team, the Milwaukee Brewers, from the American League to the National League because he thought it would make the franchise more valuable. He also tried to deep-six the Minnesota Twins, under the guise of weeding out weak franchises. That the Twins were in competition with his team for fans and media money in that part of the country was, of course, just a coincidence.

By the way, why aren't the authorities vigorously pursuing leads to find out who leaked that "confidential" and supposedly anonymous material, which was subpoenaed as part of a grand jury investigation? The rancid hypocrisy of publicity-hungry prosecutors and score-settling baseball operatives shafting targets through selective leaks must be stopped.